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1 Chapter 02 Tax Compliance, the IRS and Tax Authorities True / False Questions 1. Corporations are required to file a tax return annually regardless of their taxable income. True False 2. The tax return filing requirements for individual taxpayers only depend on the taxpayer's filing status. True False 3. If a taxpayer is due a refund, she does not have to file a tax return. True False 4. If April 15 th falls on a Saturday, the due date for individual tax returns will be on Monday, April 17 th. True False 5. If a taxpayer is unable to file a tax return by its original due date, the taxpayer can request an automatic 9-month extension to file the return. True False 6. An extension to file a tax return does not extend the due date for tax payments. True False 7. The statute of limitations for IRS assessment generally ends four years after the date a tax return is filed. True False 2-1

2 8. For fraudulent tax returns, the statute of limitations for IRS assessment is ten years. True False 9. The IRS DIF system checks each tax return for mathematical mistakes. True False 10. Joel claimed a high amount of charitable contributions as a deduction on his tax return relative to taxpayers with similar income levels. The information matching program is the IRS program most likely to identify Joel's tax return for audit. True False 11. Office examinations are the most common type of IRS audit. True False 12. The three basic types of IRS examinations are computer exams, office exams, and business exams. True False 13. The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to the proposed IRS adjustment. True False 14. The "90-day" letter gives the taxpayer the opportunity to pay the proposed tax adjustment or file a petition in the U.S. District Court to hear the case. True False 15. If a taxpayer has little cash and a very technical tax case that she feels very strongly that the tax rules are "on her side," she should prefer to have her case tried in the U.S. Tax Court. True False 2-2

3 16. In researching a tax issue, Eric finds that the U.S. Circuit of Appeals for the Federal Circuit previously has ruled in favor of his tax position, whereas the 11 th Circuit (Eric's circuit) previously has ruled against his tax position. If Eric is contemplating litigating his tax position with the IRS, he should prefer to have his case first tried by the U.S. Tax Court. True False 17. If a taxpayer loses a case at the Circuit Court level, he is granted an automatic appeal hearing with the Supreme Court. True False 18. Secondary authorities are official sources of the tax law with a lesser "weight" than primary authorities. True False 19. Revenue rulings and revenue procedures are examples of primary authorities. True False 20. The Internal Revenue Code and tax treaties are examples of statutory authorities. True False 21. Because the U.S. District Court hears a broader set of cases, decisions by the U.S. District Court may be considered to have more authoritative weight than the U.S. Court of Federal Claims. True False 22. Temporary Regulations have more authoritative weight than revenue rulings. True False 2-3

4 23. Legislative and Interpretative Regulations have the same authoritative weight. True False 24. An acquiescence indicates that the IRS lost a court case and that it has decided to follow the court's ruling in the future. True False 25. The Internal Revenue Code of 1986 is the name of the current tax code. True False 26. As required by the Constitution, all tax bills are supposed to originate in the House of Representatives. True False 27. The Senate Ways and Means Committee is in charge of drafting tax bills in the U.S. Senate. True False 28. Closed facts are especially conducive to tax planning. True False 29. Of the two basic types of tax services, beginning tax researchers often prefer topical tax services. True False 30. In researching a question of fact, the researcher will focus her efforts on identifying authorities with fact patterns similar to her client's facts. True False 2-4

5 31. Under the Statement on Standards for Tax Services, a CPA may recommend a tax return position if the position is frivolous and the position is not disclosed on the tax return. True False 32. In general, a CPA will satisfy his professional responsibilities under the Statement on Standards for Tax Services and Circular 230 if he recommends a tax return position in which he has a good faith belief that the position has a realistic possibility (1/3 rd probability) of being sustained by the IRS or the courts. True False 33. Under the tax law, taxpayers may be subject to both civil and criminal penalties for underpaying their tax liability (e.g., due to fraud). True False 34. A taxpayer can avoid an underpayment penalty if there is substantial authority that supports her tax return position. True False 35. If the IRS assesses additional tax upon audit, a taxpayer may be subject to interest and penalties on the underpayment. True False Multiple Choice Questions 36. Which of the following is not a factor that determines whether a taxpayer is required to file a tax return? A. Filing Status. B. Taxpayer's gross income. C. Taxpayer's employment. D. Taxpayer's age. 2-5

6 37. If Paula requests an extension to file her tax return, the latest she could file her return without penalty is: A. September 15 th. B. October 15 th. C. August 15 th. D. November 15 th. 38. If Lindley requests an extension to file her tax return, the latest she could pay her tax due without penalty is: A. April 15 th. B. October 15 th. C. August 15 th. D. November 15 th. 39. Corporations are required to file a tax return only if their taxable income is greater than: A. $0. B. $1,000. C. $600. D. $750. Corporations are always required a tax return. 40. This year April 15 th falls on a Saturday. Individual tax returns will be due on: A. April 14 th. B. April 15 th. C. April 16 th. D. April 17 th. 2-6

7 41. Dominique earned $1,500 this year, and his employer withheld $200 of federal income tax from his salary. Assuming that Dominique will have zero tax liability this year, he: A. is required to file a tax return. B. is not required to file a tax return but should file a return anyway. C. is required to file a tax return but should not file because he owes no tax. D. is not required to file a tax return and should not file a return. 42. Greg earned $20,500 this year and had $1,500 of federal income taxes withheld from his salary. Assuming that Greg will have a total tax liability of $1,000 (and thus will receive a $500) refund, he: A. is required to file a tax return. B. is not required to file a tax return but should file a return anyway. C. is required to file a tax return but should not file because he owes no tax. D. is not required to file a tax return and should not file a return. 43. Bill filed his 2009 tax return on March 15 th, The statute of limitations for IRS assessment on Bill's 2009 tax return should end: A. March 15 th, B. April 15 th, C. March 15 th, D. April 15 th, Henry filed his 2009 tax return on May 15 th, The statute of limitations for IRS assessment on Bill's 2009 tax return should end: A. May 15 th, B. April 15 th, C. May 15 th, D. April 15 th,

8 45. Allen filed his 2009 tax return on May 15 th, 2010 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2009 tax return should end: A. May 15 th, B. April 15 th, C. May 15 th, D. April 15 th, Andy filed a fraudulent 2009 tax return on May 1, The statute of limitations for IRS assessment on Andy's 2006 tax return should end: A. May 1 st, B. April 15 th, C. May 1 st, D. April 15 th, Martin has never filed a 2008 tax return despite earning approximately $20,000 providing landscaping work in the community. When does the statute of limitations expire for Martin's 2008 tax return? A B C D Which of the following is not a common method that the IRS uses to select returns for audit? A. DIF system. B. Tax Select system. C. Information matching. D. Document perfection. 2-8

9 49. Leslie made a mathematical mistake in computing her tax liability. Which audit program will likely catch Leslie's mistake? A. DIF System. B. Mathematical correction. C. Document perfection. D. Information matching. 50. Tyrone claimed a large amount of charitable contributions as a tax deduction relative to taxpayers with similar levels of income. If Tyrone's tax return is chosen for audit because of his large charitable contributions, which audit program likely identified Tyrone's tax return for audit? A. DIF System. B. Deduction Detective. C. Document perfection. D. Information matching. 51. Ramon's tax return was randomly selected for audit. Which IRS program likely selected Ramon's return for audit? A. DIF System. B. National Research Program. C. Document perfection. D. Information matching. 52. Which of the following audits is the most common and typically less comprehensive? A. Correspondence. B. Random. C. Office. D. Field. 2-9

10 53. Which of the following audits is the least common, broadest in scope, and typically most complex? A. Correspondence. B. Targeted. C. Office. D. Field. 54. Dan received a letter from the IRS that gave him the choice of (1) requesting a conference with an Appeals Officer or (2) agreeing to a proposed tax adjustment. Dan received the: A. 30-day letter. B. 90-day letter. C. Appeals letter. D. Tax adjustment letter. 55. Basu received a letter from the IRS that gave him the choice of (1) paying a proposed deficiency or (2) filing a petition with the U.S. Tax Court. Basu received the: A. 30-day letter. B. 90-day letter. C. Appeals letter. D. Tax adjustment letter. 56. Which of the following courts is the only court that provides for a jury trial? A. Tax Court. B. U.S. Court of Federal Claims. C. U.S. District Court. D. U.S. Circuit Court of Appeals. 2-10

11 57. Lavonda discovered that the 5 th Circuit (where Lavonda resides) has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case: A. Tax Court only. B. U.S. Court of Federal Claims only. C. U.S. District Court only. D. Tax Court or the U.S. District Court. E. Tax Court or the U.S. Court of Federal Claims. 58. Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case: A. Tax Court only. B. U.S. Court of Federal Claims only. C. U.S. District Court only. D. Tax Court or the U.S. District Court. E. Tax Court or the U.S. Court of Federal Claims. 59. Rowanda could not settle with the IRS at the appeals conference. If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency, Rowanda should litigate in the: A. U.S. District Court. B. U.S. Circuit Court of Appeals. C. U.S. Court of Federal Claims. D. U.S. Tax Court. 60. Which of the following is not considered a primary authority? A. Tax Court case B. Regulation C. Revenue Ruling D. Tax Service 2-11

12 61. Which of the following is not considered a secondary authority? A. Text book B. Private letter ruling C. Tax article D. Tax Service 62. Which of the following has the highest authoritative weight? A. Text book. B. Private letter ruling. C. Revenue ruling. D. Tax Service. E. Tax article. 63. Which of the following has the highest authoritative weight? A. Legislative regulation. B. Private letter ruling. C. Revenue ruling. D. Interpretative regulation. E. Revenue procedure. 64. Josephine is considering taking a 6 month rotation in Paris for her job. Which type of authority may be especially helpful in determining the tax consequences of Josephine's job in Paris? A. determination letter. B. private letter ruling. C. tax treaty. D. regulation. E. revenue procedure. 2-12

13 65. Generally, code sections are arranged (grouped together): A. chronologically B. by topic C. randomly D. by length 66. Which of the following has the lowest authoritative weight? A. Legislative regulation. B. Private letter ruling. C. Revenue ruling. D. Interpretative regulation. E. Revenue procedure. 67. Which judicial doctrine means that a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction? A. judicial hierarchy B. the Goldman rule C. judicial consistency D. stare decisis E. None of the above 68. The regulation with the highest authoritative weight is the: A. procedural regulation B. interpretative regulation C. proposed regulation D. legislative regulation E. None of the above 2-13

14 69. Princess, who resides in the 2 nd Circuit, recently found a circuit court case that is favorable to her research question. Which of the following circuits would she prefer to have issued the opinion? A. 2 nd Circuit B. Federal Circuit C. 1 st Circuit D. 2 nd Circuit or the Federal Circuit E. None of the above 70. Jaime recently found a "favorable" trial level court opinion directly on point for her tax question. Which trial level court would he prefer to have issued the opinion? A. Tax Court B. District Court C. Circuit Court D. Divorce Court E. None of the above 71. Which of the following committees typically initiates for tax legislation? A. House Ways and Means Committee B. Joint Conference Committee C. Senate Finance Committee D. Senate Tax Committee 72. Edie would like to better understand a new code section enacted four weeks ago. Which of the following authorities will help Edie understand the newly enacted code section? A. IRS regulations B. U.S. Tax Court cases C. Committee reports D. IRS revenue rulings 2-14

15 73. If the President vetoes tax legislation, Congress: A. cannot override the President's veto. B. can override the President's veto with a 50 percent positive vote in the House and Senate. C. can override the President's veto with a 2/3 rd positive vote in the House and Senate. D. can override the President's veto with a 75 percent positive vote in the House and Senate. 74. Jeremy has a new client. He has identified a research question that relates to a transaction that the client completed several months ago. This type of research question will primarily involve: A. open facts. B. new facts. C. old facts. D. closed facts. 75. In a planning context, A. closed facts are preferred to open facts. B. new facts are preferred to old facts. C. old facts are preferred to new facts. D. open facts are preferred to closed facts. 76. Which of the following types of tax services are arranged by code section? A. legal tax service. B. annotated tax service. C. professional tax service. D. topical tax service. 2-15

16 77. Which of the following is not a common tool used in conducting tax research? A. citatory. B. annotated tax service. C. topical tax service. D. keyword search. 78. Which of the following is not a source of a tax practitioner's professional responsibilities? A. AICPA Code of Professional Conduct. B. Statements on Standards for Tax Services. C. Circular 230. D. State Board of Accountancy statutes. 79. According to the Statement on Standards for Tax Services, a tax practitioner can recommend a tax return position: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. only if the position meets the "more likely than not" standard. D. only if the position meets the "clear and convincing evidence" standard. 80. Circular 230 was issued by: A. AICPA. B. State Boards of Accountancy. C. American Bar Association. D. IRS. 81. Which of the following is a false statement? A taxpayer filing a fraudulent tax return: A. is potentially subject to criminal penalties. B. is potentially subject to civil penalties. C. is potentially subject to fines and a prison sentence. D. will have an unlimited statute of limitations for the fraudulent tax return. 2-16

17 82. Which of the following is not a civil penalty imposed on taxpayers? A. failure to file a tax return. B. failure to pay tax owed. C. fraud. D. failure to make estimated tax payments. 83. A taxpayer can avoid a substantial understatement of tax penalty if: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. if there is substantial authority to support the position. D. if the position has a reasonable basis and is not disclosed on the tax return. 84. A taxpayer can avoid a substantial understatement of tax penalty if: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. if the position is not frivolous and disclosed on the tax return. D. if the position has a reasonable basis and is disclosed on the tax return. 85. Which types of penalties are only imposed after normal due process including a trial? A. criminal penalties. B. civil penalties. C. criminal and civil penalties. D. tax return. 86. A tax practitioner can avoid IRS penalty relating to a tax return position if: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. if there is substantial authority to support the position. D. if the position has a reasonable basis and is not disclosed on the tax return. 2-17

18 87. A tax practitioner can avoid IRS penalty relating to a tax return position if: A. if the position has a more likely than not chance of being sustained by the IRS or courts. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. if there is not substantial authority to support the position. D. if the position has a reasonable basis and is disclosed on the tax return. Essay Questions 88. Tina has a very complex tax return and it looks like she will not be able to file her tax return by its due date. When is her tax return due? What are Tina's options for paying her tax due and filing her tax return this year? What are the consequences if Tina does not file or pay her tax timely? Be specific. 89. For the following taxpayers indicate whether the taxpayer should file a tax return and why? a. Robert earned $50,000 this year as a staff accountant. His estimated tax liability is $4,500, and he expects to receive a $500 tax refund. b. Amy earned $4,000 this year working part-time. She will have no federal tax liability and has not made any federal tax payments. c. Ty earned $2,500 this summer and had $200 of federal taxes withheld from his paycheck. He will have no federal tax liability this year. d. Startup Corporation had a $50,000 loss this year. e. The Walker family trust earned $500 of income this year. 2-18

19 90. For the 2009 tax returns, indicate when the statute of limitation expires and why? a. Phoenix filed his tax return on February 28, b. Jill and Randy filed their tax return on August 16, c. Although required to file, Catherine chose not to file a tax return this year because she was expecting a tax refund and could not pull together all the information needed to file the return. d. Jerry filed his tax return on May 22, 2010 but has accidentally underreported his taxable income by 30%. 91. For the 2009 tax returns, indicate when the statute of limitation expires and why? a. Simon filed his tax return on April 10, b. Billy and Barbara filed their tax returns late on December 1, c. Pearson earns a living through various illegal activities. He filed his tax return on March 14, 2010 but did not report his illegal income on his tax return. d. Luther filed his tax return on July 17, 2010 but has accidentally underreported his taxable income by 20%. 2-19

20 92. For the following tax returns, identify the method the IRS likely used to select the return for audit. a. Dan made a mistake in adding his income on his tax return. b. Juanita failed to report her salary from her 2 nd job on her tax return. c. Michael and Venita deducted a relatively large amount of travel expenses on their tax return for their business. The travel expense is large relative to other taxpayers in similar businesses with similar levels of income. d. Paul and Melissa recently went through a very nasty divorce. One of the issues was Paul's less than forthright accounting of his income in determining the appropriate level of alimony. 93. For the following tax returns, identify which of the three audit types will most likely be utilized. a. The IRS selected Don's return for audit because of his high itemized deductions. The IRS would like documentation of these deductions. b. Large Public Corporation is a very large publicly traded corporation. It is involved in many complex transactions that have significant tax ramifications. c. George and Barbara operate a small business out of their home. The IRS has identified a couple of issues that may relate to their business. d. The IRS selected Bill and Hillary's tax return for review because of some of their investment sales. They would like a better understanding of the transactions and parties involved. 2-20

21 94. The IRS has recently completed its audit of Lorene's corporation. As a tax novice, she has very little understanding regarding the audit process and what happens next. Describe the post-audit process for Lorene and identify her options. 95. Mel recently received a 30 day notice from the IRS. Although his tax return being audited has several potential large issues (potential tax consequences of $70,000 - $80,000), the IRS agent auditing his return only identified one item that will require a more modest adjustment ($10,000). Mel feels strongly that the $10,000 adjustment would not hold in court and was surprised that the IRS agent did not identify some of the other potential larger issues. What are Mel's choices with the 30 day letter and what factors should influence his decisions? 96. Kim has decided to go to litigate a tax issue with the IRS. Describe the trial level courts that Kim may use to litigate the case. 2-21

22 97. For the following taxpayers, please recommend the most advantageous trial level court(s) to litigate a tax issue with the IRS. a. Joe is litigating a tax issue with the IRS that is considered a question of fact (i.e., the answers depends on the facts of the case). There is not a lot of authority on point for this case but Joe has a very appealing story to justify his position that is likely to be viewed sympathetically by his peers. b. The Circuit Court of Appeals for the Federal Circuit recently issued an opinion that is very favorable to the issue that Jesse plans to litigate with the IRS. c. The Circuit Court of Appeals for the Federal Circuit recently issued an opinion that is not favorable to the issue that Hank plans to litigate with the IRS. d. The 7 th Circuit (where Elizabeth resides) recently issued an opinion that is very favorable to the issue that Elizabeth plans to litigate with the IRS. 98. A client has recently learned of a recently proposed tax bill that would increase the tax rates on investment gains by 5 percent. The President does not support this increase. Please describe for your client the process by which new tax legislation is created and how the President's disapproval may influence the enactment of the bill. 99. Chris and Chuck were recently debating whether the Internal Revenue Code is "logical." Chris offers that she has briefly reviewed the Code and could hardly understand its organizational structure, if there is one. Please describe how the basic organization of the code and how understanding its organization may be especially beneficial to the tax researcher. 2-22

23 100. Carey was researching a tax issue and located what appears to be a favorable IRS regulation. He knows that regulations serve different purposes and are issued in different forms. Which purpose and which form of regulation would provide Carey the most confidence that he has found an authority that carries a lot of weight for the long term? How could Carey check the status of this regulation? 101. Campbell was researching a tax issue and found a favorable Tax Court opinion and an IRC Code Section that appears to answer the question. Is she finished with the research process? If so, why? If not, what must she do? 102. Roddy was researching an issue and found a favorable Tax Court decision that addresses his issue. He also determined that there was a nonacquiescence for the case. Who issued the nonacquiescence? What is it? What does it mean and how would it affect Roddy's reliance on the court case? 2-23

24 103. Raul was researching an issue and found two Tax Court decisions issued within 6 months of each other, one for a taxpayer residing in California and the other for a taxpayer residing in New York. Raul knows that the federal tax law does not differ by state and the issue was exactly the same in both cases. Raul is confused because he thought that a basic judicial doctrine was that a court is supposed to rule consistently. Name and describe this judicial doctrine that requires judicial consistency and discuss why the Tax Court may have intentionally ruled inconsistently in this example Rebecca is at a loss. A new tax law was recently passed, and she needs to get a better understanding of why the tax law was passed and the intent of the law from an official authority. Describe what authorities may be especially helpful to Rebecca and why she can't find many authorities that discuss the new law Lakeisha, a 1 st year staff accountant, was researching a tax issue and found what appears to be the answer to her question in her introductory tax textbook that she bought three years ago. She is thrilled because she thought it would take much longer to find her answer. What type of authority is the textbook? What are other examples of this type of authorities? Can Lakeisha base her research conclusion on the textbook or similar authorities? Any suggestions for Lakeisha? 2-24

25 106. Kodak is a beginning tax researcher. He knows that the 1 st step of the research process is to get an understanding of the facts surrounding the transaction being researcher. Describe the two basic types of facts, the sources of facts for a research project, and any advice that may help Kodak Caitlin is a tax manager for an accounting firm, and Duff is a first year staff accountant. Describe the differences in the manner in which Caitlin and Duff may identify research issues and in general how one may identify research questions Lindy, a tax intern, is beginning her 1 st tax research case for her employer. Her manager has given her a basic understanding of the facts and has identified the basic research question. Lindy is now ready to begin searching for relevant tax authorities. Describe the different types of research tools available to help a tax researcher locate relevant authority and identify type may be especially useful for Lindy. 2-25

26 109. Hong, an introductory tax student, is beginning his 1 st research project. He has a complete understanding of the relevant facts for his project and has identified the initial research questions. He is now ready to begin using tax services to identify relevant authorities. What are some suggestions for him on how to use tax services to identify relevant authorities? 110. Mary Ann is working on a pretty big research project. Her manager has alerted her to the possibility that some of her research questions are likely to be questions of fact, whereas others are likely to be questions of law. Explain the difference between the two types of questions and how this would influence her research Nolene suspects that one of her new clients may be intentionally underreporting his taxable income. What are the potential ramifications to his client of this behavior? What are the consequences to Nolene if she assists in the client in underreporting income? Any advice for Nolene? 2-26

27 112. Houston has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide a favorable answer for his client. Nonetheless, there are several authorities that provide an unfavorable answer. Houston estimates that if the client takes the more favorable position on its tax return that there is approximately a 60 percent chance that the position will be sustained upon audit or judicial proceeding. If the client takes this position on its tax return, will Houston be subject to penalty? Will the client potentially be subject to penalty? 2-27

28 Chapter 02 Tax Compliance, the IRS and Tax Authorities Answer Key True / False Questions 1. Corporations are required to file a tax return annually regardless of their taxable income. TRUE AICPA: Reporting Learning Objective: 1 2. The tax return filing requirements for individual taxpayers only depend on the taxpayer's filing status. FALSE AICPA: Reporting Learning Objective: 1 3. If a taxpayer is due a refund, she does not have to file a tax return. FALSE AICPA: Reporting Learning Objective:

29 4. If April 15 th falls on a Saturday, the due date for individual tax returns will be on Monday, April 17 th. TRUE AICPA: Reporting Learning Objective: 1 5. If a taxpayer is unable to file a tax return by its original due date, the taxpayer can request an automatic 9-month extension to file the return. FALSE Learning Objective: 1 Level of Difficulty: Easy 6. An extension to file a tax return does not extend the due date for tax payments. TRUE Learning Objective: 1 Level of Difficulty: Easy 7. The statute of limitations for IRS assessment generally ends four years after the date a tax return is filed. FALSE Learning Objective: 1 Level of Difficulty: Easy 2-29

30 8. For fraudulent tax returns, the statute of limitations for IRS assessment is ten years. FALSE Learning Objective: 1 9. The IRS DIF system checks each tax return for mathematical mistakes. FALSE Learning Objective: Joel claimed a high amount of charitable contributions as a deduction on his tax return relative to taxpayers with similar income levels. The information matching program is the IRS program most likely to identify Joel's tax return for audit. FALSE Learning Objective: Office examinations are the most common type of IRS audit. FALSE Learning Objective:

31 12. The three basic types of IRS examinations are computer exams, office exams, and business exams. FALSE Learning Objective: The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to the proposed IRS adjustment. TRUE Learning Objective: The "90-day" letter gives the taxpayer the opportunity to pay the proposed tax adjustment or file a petition in the U.S. District Court to hear the case. FALSE Learning Objective: If a taxpayer has little cash and a very technical tax case that she feels very strongly that the tax rules are "on her side," she should prefer to have her case tried in the U.S. Tax Court. TRUE Learning Objective:

32 16. In researching a tax issue, Eric finds that the U.S. Circuit of Appeals for the Federal Circuit previously has ruled in favor of his tax position, whereas the 11 th Circuit (Eric's circuit) previously has ruled against his tax position. If Eric is contemplating litigating his tax position with the IRS, he should prefer to have his case first tried by the U.S. Tax Court. FALSE Learning Objective: If a taxpayer loses a case at the Circuit Court level, he is granted an automatic appeal hearing with the Supreme Court. FALSE Learning Objective: 2 Level of Difficulty: Easy 18. Secondary authorities are official sources of the tax law with a lesser "weight" than primary authorities. FALSE Learning Objective: Revenue rulings and revenue procedures are examples of primary authorities. TRUE Learning Objective:

33 20. The Internal Revenue Code and tax treaties are examples of statutory authorities. TRUE Learning Objective: Because the U.S. District Court hears a broader set of cases, decisions by the U.S. District Court may be considered to have more authoritative weight than the U.S. Court of Federal Claims. FALSE Learning Objective: Temporary Regulations have more authoritative weight than revenue rulings. TRUE Learning Objective: Legislative and Interpretative Regulations have the same authoritative weight. FALSE Learning Objective:

34 24. An acquiescence indicates that the IRS lost a court case and that it has decided to follow the court's ruling in the future. TRUE Learning Objective: The Internal Revenue Code of 1986 is the name of the current tax code. TRUE Learning Objective: 4 Level of Difficulty: Easy 26. As required by the Constitution, all tax bills are supposed to originate in the House of Representatives. TRUE Learning Objective: 4 Level of Difficulty: Easy 27. The Senate Ways and Means Committee is in charge of drafting tax bills in the U.S. Senate. FALSE Learning Objective:

35 28. Closed facts are especially conducive to tax planning. FALSE Learning Objective: Of the two basic types of tax services, beginning tax researchers often prefer topical tax services. TRUE Learning Objective: In researching a question of fact, the researcher will focus her efforts on identifying authorities with fact patterns similar to her client's facts. TRUE Learning Objective: Under the Statement on Standards for Tax Services, a CPA may recommend a tax return position if the position is frivolous and the position is not disclosed on the tax return. FALSE Learning Objective:

36 32. In general, a CPA will satisfy his professional responsibilities under the Statement on Standards for Tax Services and Circular 230 if he recommends a tax return position in which he has a good faith belief that the position has a realistic possibility (1/3 rd probability) of being sustained by the IRS or the courts. TRUE Learning Objective: Under the tax law, taxpayers may be subject to both civil and criminal penalties for underpaying their tax liability (e.g., due to fraud). TRUE Learning Objective: A taxpayer can avoid an underpayment penalty if there is substantial authority that supports her tax return position. TRUE AICPA: Risk analysis Learning Objective: If the IRS assesses additional tax upon audit, a taxpayer may be subject to interest and penalties on the underpayment. TRUE AICPA: Risk analysis Learning Objective:

37 Multiple Choice Questions 36. Which of the following is not a factor that determines whether a taxpayer is required to file a tax return? A. Filing Status. B. Taxpayer's gross income. C. Taxpayer's employment. D. Taxpayer's age. Learning Objective: If Paula requests an extension to file her tax return, the latest she could file her return without penalty is: A. September 15 th. B. October 15 th. C. August 15 th. D. November 15 th. Learning Objective: 1 Level of Difficulty: Easy 2-37

38 38. If Lindley requests an extension to file her tax return, the latest she could pay her tax due without penalty is: A. April 15 th. B. October 15 th. C. August 15 th. D. November 15 th. Learning Objective: 1 Level of Difficulty: Easy 39. Corporations are required to file a tax return only if their taxable income is greater than: A. $0. B. $1,000. C. $600. D. $750. Corporations are always required a tax return. Learning Objective: 1 Level of Difficulty: Easy 40. This year April 15 th falls on a Saturday. Individual tax returns will be due on: A. April 14 th. B. April 15 th. C. April 16 th. D. April 17 th. AACSB: Analytical Learning Objective:

39 41. Dominique earned $1,500 this year, and his employer withheld $200 of federal income tax from his salary. Assuming that Dominique will have zero tax liability this year, he: A. is required to file a tax return. B. is not required to file a tax return but should file a return anyway. C. is required to file a tax return but should not file because he owes no tax. D. is not required to file a tax return and should not file a return., Risk analysis Bloom's: Analytical Learning Objective: Greg earned $20,500 this year and had $1,500 of federal income taxes withheld from his salary. Assuming that Greg will have a total tax liability of $1,000 (and thus will receive a $500) refund, he: A. is required to file a tax return. B. is not required to file a tax return but should file a return anyway. C. is required to file a tax return but should not file because he owes no tax. D. is not required to file a tax return and should not file a return., Risk analysis Bloom's: Analytical Learning Objective:

40 43. Bill filed his 2009 tax return on March 15 th, The statute of limitations for IRS assessment on Bill's 2009 tax return should end: A. March 15 th, B. April 15 th, C. March 15 th, D. April 15 th, The SOL ends three years from the later of (1) the date the tax return was filed or (2) the tax return's original due date., Risk analysis Bloom's: Analytical Learning Objective: Henry filed his 2009 tax return on May 15 th, The statute of limitations for IRS assessment on Bill's 2009 tax return should end: A. May 15 th, B. April 15 th, C. May 15 th, D. April 15 th, The SOL ends three years from the later of (1) the date the tax return was filed or (2) the tax return's original due date., Risk analysis Bloom's: Analytical Learning Objective:

41 45. Allen filed his 2009 tax return on May 15 th, 2010 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2009 tax return should end: A. May 15 th, B. April 15 th, C. May 15 th, D. April 15 th, Because Allen underreported his gross income by 30 percent, the SOL ends six years from the later of (1) the date the tax return was filed or (2) the tax return's original due date., Risk analysis Bloom's: Analytical Learning Objective: Andy filed a fraudulent 2009 tax return on May 1, The statute of limitations for IRS assessment on Andy's 2006 tax return should end: A. May 1 st, B. April 15 th, C. May 1 st, D. April 15 th, There is no statue of limitations for fraudulent tax returns., Risk analysis Bloom's: Analytical Learning Objective:

42 47. Martin has never filed a 2008 tax return despite earning approximately $20,000 providing landscaping work in the community. When does the statute of limitations expire for Martin's 2008 tax return? A B C D , Risk analysis Bloom's: Analytical Learning Objective: Which of the following is not a common method that the IRS uses to select returns for audit? A. DIF system. B. Tax Select system. C. Information matching. D. Document perfection. Learning Objective: Leslie made a mathematical mistake in computing her tax liability. Which audit program will likely catch Leslie's mistake? A. DIF System. B. Mathematical correction. C. Document perfection. D. Information matching., Risk analysis Learning Objective:

43 50. Tyrone claimed a large amount of charitable contributions as a tax deduction relative to taxpayers with similar levels of income. If Tyrone's tax return is chosen for audit because of his large charitable contributions, which audit program likely identified Tyrone's tax return for audit? A. DIF System. B. Deduction Detective. C. Document perfection. D. Information matching. Learning Objective: Ramon's tax return was randomly selected for audit. Which IRS program likely selected Ramon's return for audit? A. DIF System. B. National Research Program. C. Document perfection. D. Information matching. The national research program randomly selects returns for audit to provide the necessary input into the DIF system. Learning Objective:

44 52. Which of the following audits is the most common and typically less comprehensive? A. Correspondence. B. Random. C. Office. D. Field. AICPA: Reporting Learning Objective: 2 Level of Difficulty: Easy 53. Which of the following audits is the least common, broadest in scope, and typically most complex? A. Correspondence. B. Targeted. C. Office. D. Field. AICPA: Reporting Learning Objective: 2 Level of Difficulty: Easy 54. Dan received a letter from the IRS that gave him the choice of (1) requesting a conference with an Appeals Officer or (2) agreeing to a proposed tax adjustment. Dan received the: A. 30-day letter. B. 90-day letter. C. Appeals letter. D. Tax adjustment letter. AICPA: Reporting Learning Objective:

45 55. Basu received a letter from the IRS that gave him the choice of (1) paying a proposed deficiency or (2) filing a petition with the U.S. Tax Court. Basu received the: A. 30-day letter. B. 90-day letter. C. Appeals letter. D. Tax adjustment letter. AICPA: Reporting Learning Objective: Which of the following courts is the only court that provides for a jury trial? A. Tax Court. B. U.S. Court of Federal Claims. C. U.S. District Court. D. U.S. Circuit Court of Appeals. Learning Objective: 2 Level of Difficulty: Easy 57. Lavonda discovered that the 5 th Circuit (where Lavonda resides) has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case: A. Tax Court only. B. U.S. Court of Federal Claims only. C. U.S. District Court only. D. Tax Court or the U.S. District Court. E. Tax Court or the U.S. Court of Federal Claims. The Tax Court and the U.S. District Court will appeal to the 5 th Circuit. Learning Objective:

46 58. Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case: A. Tax Court only. B. U.S. Court of Federal Claims only. C. U.S. District Court only. D. Tax Court or the U.S. District Court. E. Tax Court or the U.S. Court of Federal Claims. The U.S. Court of Federal Claims will appeal to the U.S. Circuit Court of Appeals for the Federal Circuit. Learning Objective: Rowanda could not settle with the IRS at the appeals conference. If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency, Rowanda should litigate in the: A. U.S. District Court. B. U.S. Circuit Court of Appeals. C. U.S. Court of Federal Claims. D. U.S. Tax Court. AICPA: Resource Management Learning Objective:

47 60. Which of the following is not considered a primary authority? A. Tax Court case B. Regulation C. Revenue Ruling D. Tax Service Learning Objective: 3 Level of Difficulty: Easy 61. Which of the following is not considered a secondary authority? A. Text book B. Private letter ruling C. Tax article D. Tax Service Learning Objective: 3 Level of Difficulty: Easy 62. Which of the following has the highest authoritative weight? A. Text book. B. Private letter ruling. C. Revenue ruling. D. Tax Service. E. Tax article. Learning Objective:

48 63. Which of the following has the highest authoritative weight? A. Legislative regulation. B. Private letter ruling. C. Revenue ruling. D. Interpretative regulation. E. Revenue procedure. Learning Objective: Josephine is considering taking a 6 month rotation in Paris for her job. Which type of authority may be especially helpful in determining the tax consequences of Josephine's job in Paris? A. determination letter. B. private letter ruling. C. tax treaty. D. regulation. E. revenue procedure. Learning Objective: Generally, code sections are arranged (grouped together): A. chronologically B. by topic C. randomly D. by length Learning Objective:

49 66. Which of the following has the lowest authoritative weight? A. Legislative regulation. B. Private letter ruling. C. Revenue ruling. D. Interpretative regulation. E. Revenue procedure. Learning Objective: Which judicial doctrine means that a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction? A. judicial hierarchy B. the Goldman rule C. judicial consistency D. stare decisis E. None of the above Learning Objective: The regulation with the highest authoritative weight is the: A. procedural regulation B. interpretative regulation C. proposed regulation D. legislative regulation E. None of the above Learning Objective:

50 69. Princess, who resides in the 2 nd Circuit, recently found a circuit court case that is favorable to her research question. Which of the following circuits would she prefer to have issued the opinion? A. 2 nd Circuit B. Federal Circuit C. 1 st Circuit D. 2 nd Circuit or the Federal Circuit E. None of the above Learning Objective: Jaime recently found a "favorable" trial level court opinion directly on point for her tax question. Which trial level court would he prefer to have issued the opinion? A. Tax Court B. District Court C. Circuit Court D. Divorce Court E. None of the above Learning Objective: Which of the following committees typically initiates for tax legislation? A. House Ways and Means Committee B. Joint Conference Committee C. Senate Finance Committee D. Senate Tax Committee Learning Objective:

51 72. Edie would like to better understand a new code section enacted four weeks ago. Which of the following authorities will help Edie understand the newly enacted code section? A. IRS regulations B. U.S. Tax Court cases C. Committee reports D. IRS revenue rulings Of the authorities listed, only committee reports will be available to aide in understanding a new code section. Learning Objective: If the President vetoes tax legislation, Congress: A. cannot override the President's veto. B. can override the President's veto with a 50 percent positive vote in the House and Senate. C. can override the President's veto with a 2/3 rd positive vote in the House and Senate. D. can override the President's veto with a 75 percent positive vote in the House and Senate. Learning Objective:

52 74. Jeremy has a new client. He has identified a research question that relates to a transaction that the client completed several months ago. This type of research question will primarily involve: A. open facts. B. new facts. C. old facts. D. closed facts. Bloom's: Analysis Learning Objective: 5 Level of Difficulty: Easy 75. In a planning context, A. closed facts are preferred to open facts. B. new facts are preferred to old facts. C. old facts are preferred to new facts. D. open facts are preferred to closed facts. Learning Objective: Which of the following types of tax services are arranged by code section? A. legal tax service. B. annotated tax service. C. professional tax service. D. topical tax service. Learning Objective: 5 Level of Difficulty: Easy 2-52

53 77. Which of the following is not a common tool used in conducting tax research? A. citatory. B. annotated tax service. C. topical tax service. D. keyword search. Learning Objective: Which of the following is not a source of a tax practitioner's professional responsibilities? A. AICPA Code of Professional Conduct. B. Statements on Standards for Tax Services. C. Circular 230. D. State Board of Accountancy statutes. AICPA: Decision Making Learning Objective: According to the Statement on Standards for Tax Services, a tax practitioner can recommend a tax return position: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. only if the position meets the "more likely than not" standard. D. only if the position meets the "clear and convincing evidence" standard. AICPA: Reporting Learning Objective: 6 Level of Difficulty: Hard 2-53

54 80. Circular 230 was issued by: A. AICPA. B. State Boards of Accountancy. C. American Bar Association. D. IRS. AICPA: Reporting Learning Objective: 6 Level of Difficulty: Hard 81. Which of the following is a false statement? A taxpayer filing a fraudulent tax return: A. is potentially subject to criminal penalties. B. is potentially subject to civil penalties. C. is potentially subject to fines and a prison sentence. D. will have an unlimited statute of limitations for the fraudulent tax return. AICPA: Critical thinking, Risk analysis Bloom's: Analysis Learning Objective: 1 Learning Objective: 7 Level of Difficulty: Hard 82. Which of the following is not a civil penalty imposed on taxpayers? A. failure to file a tax return. B. failure to pay tax owed. C. fraud. D. failure to make estimated tax payments. AICPA: Critical thinking, Risk analysis Bloom's: Analysis Learning Objective: 7 Level of Difficulty: Hard 2-54

55 83. A taxpayer can avoid a substantial understatement of tax penalty if: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. if there is substantial authority to support the position. D. if the position has a reasonable basis and is not disclosed on the tax return. AICPA: Critical thinking, Risk analysis Bloom's: Analysis Learning Objective: 7 Level of Difficulty: Hard 84. A taxpayer can avoid a substantial understatement of tax penalty if: A. if the position is frivolous and disclosed on the tax return. B. if the position has a realistic possibility of being sustained by the IRS or courts. C. if the position is not frivolous and disclosed on the tax return. D. if the position has a reasonable basis and is disclosed on the tax return. AICPA: Critical thinking, Risk analysis Bloom's: Analysis Learning Objective: 7 Level of Difficulty: Hard 85. Which types of penalties are only imposed after normal due process including a trial? A. criminal penalties. B. civil penalties. C. criminal and civil penalties. D. tax return. AICPA: Critical thinking, Risk analysis Bloom's: Analysis Learning Objective: 7 Level of Difficulty: Hard 2-55